I've always had a difficult time with the concept of an emergency fund. I probably should have started an emergency fund before I purchased my first home, but I put all my savings into my first home purchase. In recent years, my family has turned our dedicated emergency fund into a "fun money" account. I recently read an article by Faith and Finance about overusing emergency funds. I could relate because I rarely if ever use money from my emergency fund for actual emergencies. In fact, I have a difficult time figuring out what counts as a "need" and what counts as a "want." If someone in the family has a sense of urgency about a particular purchase, I interpret that as a "need." However, the article made me think about how I can not only build, but keep my fully-funded emergency fund in tact.
Posing as emergencies
I can avoid draining our emergency fund if I differentiate between real emergencies and things that are merely posing as financial emergencies. For example, if I lost my job I'd have every right to raid my emergency fund. However, just because I suffered a small pay cut doesn't mean I need to dip into savings. I just need to cut back on my trips to the coffee shop.
Preparing for the predicable
I shouldn't have to dip into my savings for predictable expenses. When it comes to paying for car repairs, vacations, utilities and the mortgage, I use our checking account. I no longer move money from the savings to the checking in order to cover our predictable, regular expenses. One way I overcame the temptation was to open an emergency savings account through a different bank.
Staying out of debt
Getting into debt can hamper an emergency fund since I tap the rainy-day fund rather than pay interest charges to banks. I've found using credit cards completely undermines my efforts to maintain an emergency savings account. Instead of relying on credit cards, I decline myself when I want to spend too much money on frivolous things. I no longer eat out or go to the movies if I have to use a credit card.
Increasing my limit
Instead of increasing my credit card limit, I try to increase my emergency fund. I started with a goal of having just $1,000 in emergency savings. I later boosted my goal to $10,000, but dipped into it. After replenishing my emergency account, I raised my goal to $12,000. I think about our financial situation when setting a goal. Experts say people need at least 6 to 9 months of living expenses in their rainy-day funds. However, I also want enough money to replace my vehicle if it is no longer drivable.
One of the best tips I've heard is to treat the emergency fund contributions as a bill. I tell myself I have to pay the $300 bill every month so that my emergency fund will be strong enough to support us during a financial storm.
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